In gas drilling country, the honeymoon is over on royalties

WYALUSING, Pa. (AP) — Jan Brown pores over his royalty statement and wonders where all the money went.

A few months ago, the nation’s second-largest natural gas producer siphoned $2,201 worth of gas from his 240-acre property — but paid him only $359 after taking deductions for transportation and processing.

Brown, 59, who relies on the royalties as his sole source of income, says the deductions are outrageous and claims his lease forbids them. He feels cheated and duped.

In Pennsylvania and other leading gas-producing states, a battle royal has developed over royalties, with landowners bitterly disputing the sums that some drillers have been taking from royalty checks already severely diminished by a collapse in prices.

Chesapeake Energy Corp. alone is facing royalty lawsuits in Texas, Ohio, Louisiana, Oklahoma, Arkansas and Pennsylvania — including one filed by the Pennsylvania attorney general — and says it has received subpoenas from the U.S. Department of Justice, the U.S. Postal Service and states over its royalty practices.

The deductions’ impact is especially acute in Pennsylvania, where gas extracted from the Marcellus Shale, the nation’s largest natural gas field, has been selling at a steeper discount than anywhere else in the country. Some landowners have seen their royalty checks dwindle to nothing at all, despite a 1979 state law that mandates a landowner royalty of at least 12.5 percent of the value of the gas. In rare cases, landowners have even gotten statements with negative balances.

“This is robbery,” declared Bradford County Commissioner Doug McLinko, an ardent supporter of gas drilling who has nevertheless found himself at war with the industry. “People up here are fighting mad.”

Energy companies have sunk more than 1,000 wells in McLinko’s rural county since 2009. In the early years of the fracking boom, royalties could amount to tens of thousands of dollars per month. The money helped save many family farms.

Then prices tumbled, the wells began producing less gas as they aged and residents began taking a closer look at their drastically shrunken checks. Many of them didn’t like what they saw: huge deductions for the cost of getting the gas from well to market.

Charlene and John Tewksbury, who own a dairy farm, said that for every $1.20 their gas fetched this year, Chesapeake has been taking about $1.15 in deductions. They figure the deductions have totaled $277,000 since their wells began producing gas in 2011 — cash they want back.

“It’s a lot of money. It could have done something in this state, but, instead, Chesapeake kept it,” Charlene Tewksbury said.

Chesapeake did not answer questions from The Associated Press about its practice of taking deductions, but said in a statement it has been working with the Pennsylvania attorney general’s office and class-action plaintiffs on a “global resolution” of the royalty dispute. A mediation session is scheduled for Oct. 25.

The disagreement centers on how the gas should be valued for royalty purposes.

Landowners contend they’re entitled to 12.5 percent of whatever the gas sells for, citing the state’s minimum royalty law and the gas companies’ own sales pitches that induced landowners to sign drilling leases. Drillers say the royalty is properly calculated based on the market price, less post-production deductions for transportation and processing, a method permitted in most states.

In 2010, the state Supreme Court sided with the gas companies — but also noted that state lawmakers are “best suited” to deciding how the royalties should be paid.

Lawmakers have scheduled a procedural vote Tuesday on a bill in the state House that would prevent deductions from reducing landowner royalties to below the 12.5 percent state minimum. The gas industry has been lobbying against it, asserting it would unconstitutionally interfere with tens of thousands of existing private contracts. Any contractual disputes should be decided in the courts, not through legislation, the drillers argue.

“We understand and share the frustration being voiced by some mineral owners,” Marcellus Shale Coalition spokeswoman Erica Clayton Wright said in a statement, but added that landowners and drillers both “share in the success and challenges that the market brings.”

With deductions now reducing landowners’ royalty payments by 80 or 90 percent — or more — the issue has reached a boil.

Brown, the landowner, produced a statement showing that Oklahoma City-based Chesapeake paid an effective royalty rate of just 2 percent — while another company that owns a portion of his lease, Statoil, took no deductions at all and gave him the full 12.5 percent.

He said he recently called Chesapeake and told them to take his wells offline.

“I’m not against the gas companies. I just want them to treat us fair,” Brown said. “They made a promise; I expect them to live up to the promise.”